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April 20, 2012

Regulators Should Consider Limiting Bank Asset Pledges: BoE Official

Bank of England (BoE) official Andrew Haldane pointed out areas in which regulators should consider imposing limits and restrictions, among them the question of how much in assets a bank should be allowed to pledge to investors.

Bloomberg reported Friday that Haldane, executive director for financial stability at BoE, raised the issues during an April 14 speech that will be published by the bank on April 24. Regarding limits on bank asset pledges, he said that investors worried about safety have caused an increased demand for secured finance.

With more investors looking for collateral, he said, “The unsecured market has found itself squeezed. It results in banks’ balance sheets progressively becoming more encumbered.”

Euro area banks must refinance approximately $1.1 trillion in 2012, he said, and most of that amount is unsecured. So far, he added, the portion of that money that has been refinanced in the unsecured market “has been minuscule”; in addition, “a good chunk of it” was done through the long-term loans extended by the European Central Bank (ECB)—its so-called Longer Term Refinancing Operations (LTROs).

“They are signing away their assets to an increasing number of investors,” Haldane said. “Those assets cannot be signed away indefinitely.”

He also criticized the practice of quote stuffing, in which traders submit and then quickly cancel orders before they can be executed. Quote stuffing both ties up bandwidth and creates an appearance of greater market liquidity than actually exists.

Regulators should address this practice, he said, suggesting that they might need to consider restricting order cancellations and creating “circut breakers that sit across the system as a whole. We might require traders in financial markets to commit to provide liquidity, trade continuity, price continuity.”

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